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Clean Energy Fuels: Why You Can Consider Going Long

Summary CLNE’s margin has improved in the past year despite lower revenue as its margin/gallon is steady due to a diversified base of fleet operators and protection from the retail price. The price of natural gas/diesel gallon equivalent was $0.27 last month, which is way cheaper than diesel and gasoline, which is why CLNE’s volumes will continue increasing. CLNE’s natural gas volumes will increase as the addressable market grows from 74 million gallons last year to 1 billion gallons of diesel equivalent in 2018. CLNE could also benefit from an improvement in natural gas pricing as LNG exports from the U.S. begin next year, leading to lower oversupply and a move toward international pricing. The decline in natural prices has put the brakes on Clean Energy Fuels’ (NASDAQ: CLNE ) performance this year. After recording consistent top line growth until 2014, the company’s top line performance has slid this year. This is evident from the chart given below: Don’t miss the positives However, the above chart also shows that despite the drop in its top line, Clean Energy has managed to improve its margin profile since the downturn in natural gas pricing began. This is an impressive fact if we consider that low natural gas prices should have ideally pulled down Clean Energy Fuels’ margin profile, but the company has managed to keep its margin per gallon intact. For instance, last quarter, Clean Energy’s gross margin was $0.26 per gasoline gallon equivalent, down just $0.02 per gasoline gallon equivalent from last year. This is impressive if we consider that prices have dropped massively in the past year. The reason why Clean Energy’s margins have held steady in these difficult times is because the company has a diversified base of fleet operators that use its natural gas fuel volumes, and these are protected to some extent from the retail price due to the contracts in place. More importantly, it should also be noted that despite lower diesel prices, the use of natural gas fuel has not dropped as fleet operators have continued adding more NGVs to their fleets. This is clearly reflected by the fact that Clean Energy’s volumes delivered in the previous quarter grew 17% year-over-year. Now, on taking a closer look, it becomes clear that natural gas is still a cheaper fuel option than diesel despite the decline in diesel prices this year. Take a look at the following table for more clarity: Source: Westport Innovations Hence, the price of natural gas per diesel gallon equivalent stood at $0.27 last month, which is lower than the regular gasoline price of $2.059 per gallon and diesel price of $2.421 per gallon last month. So, it is not surprising to see that Clean Energy has seen an increase in its volumes delivered this year even though diesel prices have weakened, which lowers the incentive of switching to natural gas fuel for fleet operators. Why Clean Energy’s drop is an opportunity As discussed above, Clean Energy is seeing both volume and margin growth, while natural gas has an advantage over diesel in terms of both costs and emissions. As a result, the adoption of natural gas-powered trucks and buses should continue increasing going forward. For instance, in the past few years, the adoption of CNG trucks in the refuse transit market has increased, as shown below. More importantly, the adoption of heavy-duty LNG trucks as a percentage of overall sales will increase in the coming years, leading to an increase in gallons delivered from 74 million last year to 1 billion in 2018: (click to enlarge) Source: Clean Energy Fuels Hence, due to the advantages of natural gas, its adoption will increase going forward and help Clean Energy amplify its volumes delivered. However, as we saw earlier in the article, the steep drop in the price of natural gas has made it difficult for Clean Energy to grow revenue, but this might change next year onward as LNG shipments from the U.S. start gaining traction next year. By 2020, Australia and the U.S. are expected to make up for almost the entire 50% increase in global LNG trade, with the latter expecting to become an LNG exporter on the level of Qatar. Now, if we consider that the supply situation in the global LNG market is weak and the U.S. is aggressively building its LNG export infrastructure as shown in the chart below, the oversupply situation in the U.S. natural gas market will ease going forward as exports begin. Source: Cheniere Energy Also, due to these exports, the price of natural gas in the U.S. will move closer to international levels, which are higher, and eventually lead to better natural gas pricing in the U.S. as well. As a result, Clean Energy will see an increase in both revenue and margins going forward. Conclusion The performance of Clean Energy Fuels on the stock market has been no less than disappointing this year, but there are positives that we should not miss. The company’s volumes and margins are increasing, while a potential improvement in natural gas prices will be another tailwind. So, it seems like a prudent idea to buy shares of Clean Energy Fuels on the drop as it can deliver gains in the long run.

What ‘Smart Beta’ Means To Us

Summary The absence of a generally accepted definition of “smart beta” has given people license to describe a wide range of products as smart beta strategies. In equity investing, we use smart beta to refer to valuation-indifferent strategies that break the link between the price of an asset and its weight in the portfolio while retaining. By sharing our thoughts about the term, we hope to guide the discussion towards the real issue: how best to manage investor assets. As with most new expressions, “smart beta” is in the process of seeking an established meaning. It is fast becoming one of the most overused, ill-defined, and controversial terms in the modern financial lexicon. Unfortunately, the success of so-called smart beta products has attracted a host of new entrants purporting to be smart beta products when, frankly, they aren’t! They stretch the definition of smart beta to encompass their products, a natural business strategy. Without a simple, generally accepted meaning, the term “smart beta” risks becoming meaningless. Is that a bad thing? Probably not to the critics of the term smart beta. These are mainly the definitional purists. Bill Sharpe, who coined and defined “alpha” and “beta” in his seminal work (1964), famously remarked that the term makes him “definitionally sick.” His objection is completely legitimate: Bill defined beta as merely a measure of the non-diversifiable risk of a portfolio, measured against the capitalization-weighted market, and defined alpha as the residual return that’s not attributable to the beta. Some providers of traditional cap-weighted indices similarly object, either because they believed that there is only one “true” beta or because they infer from the smart beta label that its advocates believe that cap weighting is “stupid beta.” C’mon folks, is the beta relative to the S&P 500 Index-an actively selected broad-market core portfolio- really the one true beta?! Also, the practitioner community has increasingly embraced the notion of seeking beta (which has already morphed in meaning to refer to exposure to chosen markets, not the total market portfolio of investable assets, as CAPM originally defined it) for free, and paying for alpha. Viewed in this context, smart beta actually can mean something useful: a smarter way for investors to buy beta with alpha . After all, if one can find a more reliable alpha, and pay less for it, that would be pretty smart. The early critics of our Fundamental Index™ work were quick to point out that it was just a backtest and was merely clever repackaging of value investing. Well, it was a backtest, and it has a value tilt against the cap-weighted market. (Or, just to be provocative, does the cap-weighted market have a growth tilt against the broad macroeconomy, providing investors with outsized exposure to companies that are expected to grow handily, and skinny exposure to troubled companies?) It’s not a backtest anymore, as we approach our 10th anniversary of live results; and it has outperformed the cap-weighted market in most of the world, during a time when value generally underperformed growth . Critics have become more muted, as the efficacy of the Fundamental Index method (and other so-called smart beta strategies) is better understood. Defining Smart Beta for Equity The term smart beta grew out of attempts by people in the industry to explain the Fundamental Index approach vis-à-vis existing passive and active management strategies. When Towers Watson, a leading global investment consulting firm, coined the expression smart beta, it was not their intent to label cap-weight as “dumb beta.” Indeed, they referred to it as “bulk beta,” because it could be purchased for next-to-nothing. There is nothing “dumb” about cap-weighted indexing. If an investor wants to own the broad market, wants to pay next to nothing for market exposure, and doesn’t want to play in the performance-seeking game, cap-weighted indexing is the smartest choice, by far. People are beginning to understand that the dumb beta is the fad-chasing investor who buys whatever is newly beloved and sells whatever is newly loathed, trading like a banshee. Fortunately or unfortunately, these folks are legion, as is well documented in Russ Kinnel’s important “Mind the Gap” white papers (2005, 2014). As the debate over the smart beta label grew, Towers Watson (2013) sought to clarify the meaning of their expression with the following definition: Smart beta is simply about trying to identify good investment ideas that can be structured better… smart beta strategies should be simple, low cost, transparent and systematic. This straightforward definition indicates what investors ought to expect of a smart beta product. Our research suggests, however, that many alternative beta strategies fall short of this definition. Some are overly complex or opaque in the source of value added. Others will incur unnecessary implementation costs. Many so-called alternative beta strategies don’t seem so smart, by Towers Watson’s definition. The problem may be that even this definition is not clear enough. The absence of a rigorous, generally accepted definition gives me-too firms enough latitude to stamp smart beta on anything that’s not cap-weighted indexing. The way the term is bandied about, without much regard for meaning, is a disservice to investors. We don’t presume to define smart beta for the industry, but we would like to see more consistency in how the label is applied. Our definition builds on the Towers Watson definition, adding more specificity as it relates to equity strategies, where the smart beta revolution began almost a decade ago: A category of valuation-indifferent strategies that consciously and deliberately break the link between the price of an asset and its weight in the portfolio, seeking to earn excess returns over the cap-weighted benchmark by no longer weighting assets proportional to their popularity, while retaining most of the positive attributes of passive indexing. Earning Excess Returns The shortcomings of cap-weighted indices are by now well understood and widely acknowledged. Cap-weighted indices are “the market,” and they afford investors the market return. That’s indisputable. Nonetheless, because constituent weights are linked to price, they automatically increase the allocation to companies whose stock prices have risen, and reduce the weight for companies whose stock prices have fallen. If the market is not efficient, and prices some companies too high and some too low, then cap-weighted indices naturally have disproportionately large concentrations in companies that are likely to be overvalued and light allocations in companies that are disproportionately undervalued. This structure creates a return drag that is overcome by breaking the link between price and weight in a portfolio. 1 In fact, our research indicates that any structure that breaks the link between price and weight outperforms cap weighting in the long run. 2 In this sense, our work on the Fundamental Index concept is not special! 3 Equal weight, minimum variance, Shiller’s new CAPE index, and many others, all sever this link, and empirically add roughly the same alpha. This can be done simply, inexpensively, and mechanistically; these ideas show good historical efficacy all over the world; and some have live experience that roughly matches the backtests. Accordingly, this way to pursue a particular beta might rightly be considered “smart.” In periodically rebalancing to target weights that are unrelated to price, smart beta strategies engage in value investing: They buy low and sell high (we have demonstrated this result elsewhere 4 and will return to it in a moment). It will surprise many readers to learn that the value tilt is empirically a far smaller source of return than is the rebalancing process itself. 5 After all, what could be more uncomfortable than systematically trimming our holdings in the most extravagantly newly beloved companies, while topping up our holdings in the most newly feared and loathed companies? These portfolios look perfectly reasonable; their trading does not. That’s where the alpha is sourced: contratrading against the legions of investors who chase fads and shun recent disappointments . Accordingly, breaking the link with price is, in our view, the most important component to any useful definition of smart beta. Strategies that use market capitalization in selecting or weighting securities, such as cap-weighted value indices, are not smart beta using our definition: they leave money on the table due to the same return drag that afflicts any cap-weighted strategy. 6 Best Attributes of Passive Investing Compelling as it might be to define smart beta simply as those equity strategies that break the link with price, 7 we believe that tapping a reliable source of excess return is not sufficient to merit the label smart beta. As our general definition for equity market smart beta indicates, we also think smart beta solutions should retain some of the key benefits of passive investing, including: Smart beta strategies are transparent. The principles of portfolio construction and the intended sources of excess return are clearly stated and easy to understand. Investors know what they are getting. Smart beta strategies are rules-based. Their methodology is systematic and mechanically executed. Investors know that the process is disciplined. These strategies can be independently tested, including in out-of-sample tests covering new time spans or new markets. Smart beta strategies are low cost relative to active management . 8 In addition to lower fees, they have lower due diligence and monitoring costs. As a result, they offer investors affordable access to potential excess returns. Smart beta strategies have large capacity and the liquidity to accommodate easy entrance and exit. Smart beta strategies are well-diversified and/or span the macro economy. Because stock weights are uncoupled from prices, smart beta strategies do not expose investors to sector and industry concentrations arising from misvaluations. We think of these traits as family traits. Few will have every one of these traits; we’d be inclined to apply the smart beta label to a strategy that displays most or all of them. To us, the trait in our primary definition is sacrosanct: Any strategy that is not valuation-indifferent, that does not break the link between the weight in the portfolio and price (or market cap), is not smart beta. Performance Record We’ve described what smart beta means to us, and, in the process, indicated what we think investors should expect of products that are marketed as smart beta strategies. Is it also reasonable to expect long-term outperformance relative to cap-weighted indices? We cannot know the future. Perhaps, in the years ahead, investors will be rewarded by owning more of whatever is most expensive and less of whatever is least expensive. Personally, I doubt it. We can know the past. So-called smart beta strategies have produced value-added returns in long-term historical testing, all over the world, and on many 9 live-asset portfolios. And this outperformance has been driven, in large part, by the inherently value-based trading that takes place when smart beta portfolios are rebalanced to non-price-related weights. In long-term simulations, smart beta strategies have generated excess returns relative to cap-weighted indices. For instance, Figure 1 traces the hypothetical cumulative returns of a fundamentally weighted U.S. index and the comparable returns of two cap-weighted indices-a broad market index and a traditional value style index-over the 35-year period from 1979 through 2013. The fundamentally weighted index outperformed both of the indices whose weighting methods incorporate market prices. 10 A cautionary note is in order. As with any strategies, smart beta investing is a long-term strategy. Only a charlatan would encourage customers to expect 100% probability of future outperformance. There have been prolonged periods of underperformance, especially in secular bull markets. Smart beta strategies are contrarian, and they make sense only for investors with long-term planning horizons and a willingness to tolerate uncomfortable (even profoundly uncomfortable) portfolio rebalancing trades. In Closing Smart beta has been roundly dismissed as a marketing buzzword, rather than a significant development in finance theory and investment practice. We like the name, partly because it is jarring and controversial, but we don’t for a moment deny that it has been misused to flog me-too products. We hope that, by sharing our thoughts about the nomenclature, we can nudge the discussion in the direction of the real issue: how to best manage investor assets. Endnotes 1 To be sure, the cap-weighted index of the market cannot have a performance drag relative to itself. Here, we refer to a performance drag relative to the opportunity set. 2 Brightman (2013); Arnott, Hsu, Kalesnik, and Tindall (2013). 3 How many investment managers will say this about their own best products?! 4 Arnott, Hsu, Kalesnik, and Tindall (2013). 5 Chaves and Arnott (2012). 6 Hsu (2014). Note also that cap-weighted value strategies have a powerful, statistically significant negative Fama-French alpha. They derive value-added from their value tilt and then lose much of it due to cap weighting. 7 For bonds and other asset classes, our core definition can still apply. But, it’s a bit more nuanced. Do we want to weight a bond portfolio by the debt appetite of a borrower, and then be forced to buy more of the issuer’s debt as they seek to borrow more? That’s what cap weighting will do in bonds. Alternatively, do we want to weight a bond portfolio by the debt service capacity of the borrower, which is loosely related to the aggregate economic scale of the borrower? That’s one of many ways to construct a smart beta strategy in bonds. Historically, it works. 8 It should go without saying, but these strategies cannot price-compete with conventional cap weighting, nor should they. Did Vanguard charge 7 bps for their first S&P 500 fund? No, they did not. Should product innovation be rewarded? Of course. Reciprocally, these strategies must charge much less than the active strategies that purport to offer similar incremental returns, in order to justify their relevance. 9 We can’t say “most” because we don’t have access to the track record of all practitioners in this space. But, I personally am confident that the word “most” would be accurate… even though value has underperformed growth in most of the past decade! 10 Kalesnik (2014). References Arnott, Robert D., Jason Hsu, Vitali Kalesnik, and Phil Tindall. 2013. ” The Surprising Alpha from Malkiel’s Monkey and Upside Down Strategies .” Journal of Portfolio Management , vol. 39, no. 4 (Summer):91-105. Brightman, Chris. 2013. ” What Makes Alternative Beta Smart? ” Research Affiliates (September). Chaves, Denis B., and Robert D. Arnott. 2012. ” Rebalancing and the Value Effect. ” Journal of Portfolio Management , vol. 38, no. 4 (Summer):59-74. Hsu, Jason. 2014. ” Value Investing: Smart Beta vs. Style Indexes. ” Journal of Index Investing , vol. 5, no. 1 (Summer):121-126. Kalesnik, Vitali. 2014. “Smart Beta: The Second Generation of Index Investing.” IMCA Investments & Wealth Monitor (July/August): 25-29, 47. Kinnel, Russ. 2005. “Mind the Gap: How Good Funds Can Yield Bad Results.” Morningstar FundInvestor (July). —. 2014. “Mind the Gap 2014.” Morningstar Fund Spy (February 27). Sharpe, William F. 1964. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” Journal of Finance , vol. 19, no. 3 (September):425-442. Towers Watson. 2013. “Understanding Smart Beta.” Insights (July 23). This article was originally published on researchaffiliates.com by Rob Arnott and Engin Kose . Disclaimer: The statements, views and opinions expressed herein are those of the author and not necessarily those of Research Affiliates, LLC. Any such statements, views or opinions are subject to change without notice. Nothing contained herein is an offer or sale of securities or derivatives and is not investment advice. Any specific reference or link to securities or derivatives on this website are not those of the author.

GREK Seems Just Fairly Valued, But Many Of Its Individual Stocks Are Undervalued

Summary My rough bottoms-up valuation of the GREK index reveals just fair overall valuation. Greek banks now represent less than 5% of the GREK, and I consider them a long-term call option costing me roughly 5% of the index. While the overall GREK index looks just fairly valued, the low median values reveal that there are many very cheap individual stocks. These stocks are cheap for a reason, such as high debt, falling sales and often energy sector dependence. The general theme of Greece has come out of the headlines recently. However, its banks were very much in the spotlight in the past weeks as their stocks crashed following the expected stock dilution and lukewarm interest from institutional investors to take part in the recapitalization. With the Greek banks’ bad news getting gradually priced in, I wanted to reexamine the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) index now and attempt to make a very rough bottoms-up valuation to see if there is an attractive investing opportunity. My analysis revealed several surprises and facts, which I would like to share with my readers now. Fact #1: There is very little downside risk in GREK from the Greek banks now With year-to-date returns of Alpha Bank ( OTCPK:ALBKY ), National Bank of Greece ( OTCPK:NBGGY ), Eurobank ( OTCPK:EGFEY ) and Piraeus Bank ( OTCPK:BPIRF ) up to negative 99%, the total weight of the Greek banks in GREK has been diminished to below 5%. This significantly reduces the risk of a large decline in GREK. The GREK options implied that volatility has fallen recently to reflect this lower downside risk. So I now consider the Greek banks as a call option that costs less than 5% of the GREK index and never expires. Not only is the banks’ weight on the index insignificant, but the banks are also usually valued using industry-specific valuation metrics. Valuing them using traditional broad market valuation metrics would just distort the entire picture. Due to these two facts, I decided to simply ignore the banks in the valuation and treat them as the 5% call option that never expires. So what exactly is GREK made of? Here is the list of the current top 25 holdings, representing the overwhelming majority of the total index value, sorted by their weights on the index. The holdings and their weights are updated as of December 17, 2015 and provided my Morningstar. (click to enlarge) Source: Morningstar, author’s recalculations Financial ratio metrics I recalculated the index weight values by summing up holdings of the same company in the form of its primary stock listing (usually listed in the Athens stock exchange) and its ADR form. Here is the updated list, which simplifies things and shows a clearer picture of the holdings, including the financial ratio metrics. (click to enlarge) Source: author’s calculations based on data from Bloomberg, Morningstar, Gurufocus, Yahoo finance and Finviz A quick warning on methodology Please bear in mind that some of the data was hard to get and calculate, and had to be obtained from several sources that may not be using a consistent methodology. While most data incorporates the third quarter 2015 numbers, which include the tough period of bank transaction limits, etc., some minor data was available for the June quarter only. Therefore, an error margin should be much wider than usual, at least plus and minus 20% in the valuation metrics. Otherwise, the valuation is very representative because it takes into account ~92% of the GREK index’s holdings, omitting just the ~5% attributed to the banks for the reasons described above, and also ignoring about 3% of GREK that comes from some below 1% positions. The total GREK metrics calculations are made using a weighted average, with the values being weighted by the stock’s index weight. Negative or N/A values are ignored, and the weights of the remaining valid values are increased proportionally to make up 100%. Surprising fact #2: the GREK index as a whole looks fully valued using most financial metrics The overall dividend yield for the trailing twelve months is just 1.25%, nothing to attract income investors (even if the other risks were ignored). Other metrics are not faring much better. Consider the following. Trailing-twelve-month P/E not very attractive The average trailing-twelve-month P/E of the GREK index is ~16.14x. This is roughly on par with the U.S. and many European or other indexes of economies that are in much better shape, with much more predictable future political and economic environment. So this is a big disappointment, but in times of economic distress, P/E’s may be abnormally high or low as they near bottoms. Some commodity and energy-related GREK stocks are arguably at a deep through of the current cycle. The negative P/Es were ignored, so the calculation takes into account ~86.50% of the total index; the 10% of the index has negative earnings, and the remaining 5% are the banks. The high P/E for the two largest constituents, which are not very cyclical and represent ~40% of GREK, are not very enticing. On the other hand, if we look at the more important cash earnings, the P/FCF figures for these two largest stocks are much lower and arguably quite attractive. Trailing-twelve-month Price/free cash flow is more attractive than the TTM P/E The weighted average TTM P/FCF came in at ~13.31x. This is not bad at all given what Greece and their companies have had to go through in the past twelve months, though the largest constituent, Coca Cola HBC ( OTC:CCHBF ), is predominantly export-oriented. Nevertheless, investors can buy many companies outside of Greece with even lower P/FCF ratios and arguably similar or better prospects or at least less political and economic risk, such as even Apple (NASDAQ: AAPL ), or International Business Machines (NYSE: IBM ), or Xerox (NYSE: XRX ). The P/FCF calculation includes ~85% of the index weight. About 10% of the index has negative FCF, and the remaining 5% are the banks, which were excluded. The forward P/E is even a bit worse than the TTM P/E The weighted average forward P/E currently stands at ~16.94x, as represented by just ~54% of the index. The rest of the constituents either don’t provide forward guidance or I was not able to obtain one. So the forward P/E is less representative but not very attractive nonetheless and carries a higher risk of ending significantly off the mark as many factors are either unpredictable or not factored in the guidance. The Price-to-sales and price-to-book is similar to other markets and not very attractive The weighted average P/S came in at ~1.40x and the P/B is ~1.60x. This is nothing out of the normal range typical for other markets and doesn’t really entice much buying when so many markets with similar valuations are available to international investors. However, some companies within the average show very attractively low P/S and P/B values, indicating distress but also potential attractive deep value plays for patient investors. These include the energy sector stocks, such as Motor Oil (Hellas) Corinth Refineries SA ( OTCPK:MOHCY ), Hellenic petroleum SA (ATH:ELPE), and Public Power Corporation of Greece ( OTCPK:PUPOF ), as well as others such as Ellaktor SA ( OTCPK:ELLKY ). However, many of them carry relatively high debt and other risks. The important fact #3: Using EV/EBIT and EV/EBITDA, GREK trades at about half the S&P 500 valuation The average EV/EBIT stands at ~11.6x and is calculated using 85% of the index. The remaining 10% has negative enterprise value or negative EV/EBIT and was ignored, as were the banks. The average EV/EBITDA is ~5.7x and was derived from ~88% of the stocks weight, with ~7% being EV/EBITDA negative or having negative enterprise value, with the banks being excluded again. For a comparison, the aggregate S&P 500 EV/EBITDA currently stands at around 10x while the median value is around 11x and is arguably overvalued as a group. The GREK index trades at about a half of the EV valuation of the S&P 500. In other words, GREK would have to DOUBLE in order to trade at the same valuation as the S&P 500. And EV metrics for some individual GREK stocks are even more attractive. For example, Coca Cola HBG trades at just ~3.5x EV/EBIT and 2.29 EV/EBITDA thanks to its high debt leverage. The most important fact #4: while overall GREK valuation looks full, the mean averages are much lower, signaling plenty of individual stock opportunities in GREK While mean valuations for the U.S. indexes are mostly higher than the weighted average, in GREK, the opposite is true. There are many stocks cheaper than the overall index. In other words, while the U.S. S&P index valuation masks how expensive many of its individual stocks are, the GREK index’s seemingly unattractive overall valuation hides many undervalued stocks beneath the surface. For example, the median P/B is just 0.91, below 1x, signaling clear distress in parts of the index, especially the energy. I believe it is worth it for investors to go through the individual Greek stocks and pick the best spots rather than buy the overall index, which in itself is only fairly priced and future returns will be just average in my opinion (5% to 10% per year with high political and economic risk). Several GREK individual stock ideas for further research 1. Coca Cola HBC While the company trades at a seemingly high P/E and forward P/E, the cash metric, trailing P/FCF is sitting at just ~11x. 3.5x EV/EBIT and 2.29 EV/EBITDA are very low as well. The problem, of course, is the relatively high debt/capital ratio as well as other potential risks that need to be analyzed in more detail before buying. 2. Several other companies There are many companies trading at very attractive valuation metrics, and their individual risk profiles and future outlooks have to be carefully examined before jumping in. These include Athens Water Supply & Sewerage ( OTCPK:AHWSF ), Folli Follie ( OTCPK:FLLIY ), and Greek Organisation of Football Prognostics ( OTCPK:GOFPY ). 3. Many energy-related bargains, mostly carrying higher risk Metka SA trades at just ~6x P/E. However, it is FCF negative. As an engineering contractor, it has been negatively impacted by the energy sector weakness. However, the 2.28x EV/EBIT and 1.45x EV/EBITDA look very cheap if the company manages to survive through the downcycle. There are also several companies trading at depressed valuations due to being closely tied to falling energy prices, such as Public Power Corporation of Greece , Motor Oil (Hellas) Corinth Refineries , and Hellenic petroleum (ATH:ELPE) and Ellaktor , which trade at rock-bottom P/S ratios but carry mostly very high risk due to low commodity prices and high debt. Risks Besides the specific risks in the individual stocks, such as debt and falling sales and margins, the GREK and its constituents are prone to very high political and economic risks that may include higher taxes, price controls, and even an outright nationalization or semi-permanent strikes, revolutions, and boycotts of local sales by the local population. Conclusion While the overall GREK index does not look cheap given all the extra risks involved with Greece, the low median valuations reveal that there are many individual companies in the index that are attractively priced. However, they also carry individual risks such as high debt and more. Some individual stocks worth further investigation include Coca Cola HBG, Metka, Athens Water Supply & Sewerage, Folli Follie, and Greek Organisation of Football Prognostics. There are also several energy-related companies trading at distressed P/S ratios carrying high debt and cyclical risk. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.